4 min read 8 Nov 22
A growing number of investors are seeking ways to decarbonise real estate. In 2019, for example, the UK’s Better Buildings Partnership launched its climate commitment. Since then it has amassed 33 signatories, managing more than £380 billion of assets worldwide, pledging to publish a net zero pathway for their portfolios, as well as a plan of action.
The case for decarbonisation in real estate is gaining momentum. But to achieve net zero, all stakeholders – from investors to regulators – need to work towards the same goal.
This can prove challenging as currently there is no unified definition of net zero in real estate, nor on operational carbon – which currently accounts for the bigger share of emissions. The road to net zero in real estate is hindered by a lack of complete data on energy use and associated emissions from building tenants.
Building emissions are broadly categorised as either ‘operational carbon’ or ‘embodied carbon’. Being responsible for the larger portion of real estate emissions, operational carbon has gained more attention from regulators and investors alike.
Embodied carbon – the carbon footprint of a building before it becomes operational – accounts for a smaller share of the industry’s emissions. To date, it has been less of a focus in regulations and net zero investor frameworks.
The Institutional Investors Group on Climate Change’s (IIGCC) Net Zero Investment Framework still does not include embodied carbon in its emissions scope for real estate assets.
A lack of definition and inconsistent carbon data reporting may have important implications on investment decisions, particularly regarding where and when to incur refurbishment costs within business plans for real estate assets.
Despite a growing number of investors making net zero commitments in real estate, without complete emissions and energy consumption data they will struggle to realise their decarbonisation goals.
A useful tool to aid net zero endeavours is the EU-backed Carbon Risk Real Estate Monitor (CRREM). It helps investors set emissions and energy reduction targets, as well as monitor the performance of their real estate assets while assessing the risk of assets becoming stranded as a result of the transition to a low carbon economy.
Nina Reid, Head of Sustainability for Private and Alternative Assets at M&G Investments, explains: “Essentially CRREM sets out operational net zero pathways for different building types in different markets. It's not entirely global, but it's becoming a global tool.
“A number of the green building certifications are starting to look at the use of the CRREM tool as part of the way that they define net zero, so we expect that that will become more integrated and used with operational net zero.”
Yet CRREM still has its limitations. Currently, the model is too generic to be applied to all types of assets. Supermarkets, for example, are categorised as retail warehouses but their energy profile is substantially different than a retail warehouse used for fashion.
The CRREM model also only provides pathways for operational carbon and not embodied carbon. The tool’s efficacy is reliant on having the necessary data.
“There’s a lot of inconsistency around embodied carbon,” notes Reid. “However, there are some markets where we’re seeing regulation coming through. We expect a number of European countries will start to bring in more embodied carbon and/or whole life carbon regulation over time.”
“In the interim, while we don’t have that regulation, it makes it more challenging to tackle some of the embodied carbon piece in real estate as there isn’t that regulatory backstop to drive the market,” she adds.
Although enhancing energy efficiency in buildings is necessary to decarbonise, failing to tackle embodied carbon in real estate will hinder net zero goals in the industry due to the environmental impact of emissions created across the construction supply chain.
As buildings become more operationally efficient, embodied carbon will come to represent the larger portion of emissions caused by the built environment1.
In the absence of mandatory disclosure, obtaining embodied carbon data from supply chains is challenging. In the meantime, for net zero in real estate to be successful, in our view, the industry needs to take lead, setting its own requirements for emissions standards in real estate to facilitate the decarbonisation journey.
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